U.S. Private Equity Middle Market Update

According to newly released data from Pitchbook, middle-market private equity (PE) dealmaking in the United States in the first half of 2024 has been stable, with buyouts tracking at $345 billion and the number of deals on pace to hit 3,400 for the entire year. This makes it the third-highest middle-market PE dealmaking year on record (data does not include growth-equity deals and growth-equity platform add-ons). The middle market is companies with enterprise values between $25 million and $1 billion.

In the first half of 2024, middle-market buyout value and count increased by around 12% compared with H1 2023. PE buyout value rose by 5%, and deal count rose by 9%. These improvements are partially due to better financing terms offered for middle-market deals by banks.

Conditions are expected to remain strong for the middle market, making large-platform acquisitions easier, with more platform companies translating to more add-on acquisitions. Also, lower borrowing costs should free up capital for legacy platforms to pursue more add-ons in the middle market. Add-on acquisitions account for three out of four buyouts in the U.S. PE deal middle market, driving 54.7% of all deal value.

Valuations

PE middle-market EBITDA valuations are on an uptrend. Valuations have struggled in the past few years until recently, with deal multiples now rising to 12.9x on a trailing 12-month (TTM) basis. The same can be said for EV/revenue multiples, although more gradual at 2.2x TTM.

Roughly 4,500 PE-backed middle-market companies are waiting to be sold. 36.2% of these companies have been waiting for five years or more. As deal activity broadens, it must include companies with lower margins but faster EBITDA growth rates.

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Founder-owned businesses

In the second quarter of 2024, founder-owned companies saw an increase in representation in the overall deal mix, reaching 54.2% of deals—a significant increase from the previous quarter at 49.4%. This also transcends the five-year average of 53.5%. With anticipated interest rate cuts on the horizon, conditions favor growth in overall deal activity.

After years of high financing costs constraining deal leverage and valuations, more founders are expected to enter the market, looking to capitalize on favorable conditions in the second half of 2024. More suitors are also likely to be motivated by lower base-interest rates.

Non-backed companies are often founder-owned. They usually operate within the lower end of the market, offering more attractive purchase-price multiples, with most deals valued between $25 million and $100 million. Lower valuation metrics make non-backed businesses particularly attractive to PE investors.

Carveouts

Carveouts give sellers a strategic path to generate liquidity and boost operational flexibilities, especially for managing maturing debt or reallocating resources. These assets are typically established and show a thorough financial history, improving buyers' and lenders' due diligence process and adding transparency that attracts more buyer interest.

Carveouts were moderate in the second quarter of 2024, representing 9.5% of overall deal volume. This is down from 11.7% in the first quarter and below the historical average since 2010. The deal value was also below the historical average over the same period. Carveouts tend to be crowded out of the market as a wider spectrum of deals is seeing increased activity.

Exit strategies

While exit activity in the U.S. PE middle market struggled in the first half of 2024, it also showed some positive signs of stabilizing. With approximately 370 exits for an aggregate of $43.5 billion in the first half, activity mainly was flat on a year-over-year basis. However, the outlook does improve slightly when considering late reporting deals.

Dry powder

At the end of 2023, middle-market PE funds were sitting on $455.8 billion in dry powder. That accounted for 49.8% of the entire dry powder in the U.S. PE market. Right now, dry powder levels in the middle market remain high compared to past levels, even though they have declined by 9.3% from 2022 levels.

At today’s levels, middle-market dry powder is significantly higher than in the pre-pandemic years of 2017 to 2019, when median dry powder was at $372 billion. As PE deployment is picking up momentum, dry powder levels remain elevated even amid slight declines.

Technology

In the second quarter of 2024, middle-market deal activity in the technology space was strong, with an increase in deal value. There were 96 transactions in the quarter, up slightly at 1.1% year-over-year. Deal value for the quarter reached $12 billion, up 7.7% YoY. The technology sector’s share of middle-market deals is currently at 13.8%, up 60 basis points YoY.

Healthcare

In the healthcare sector in the second quarter of 2024, middle-market deal activity was a mixed bag, with an increase in deal value but a decline in the number of deals. The quarter recorded 85 transactions, at an 8.6% sequential drop and a 10.5% YoY decrease. Yet, deal value saw an impressive 30% increase sequentially to $10.9 billion and an 18.6% jump YoY.

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